In early 2007, Fox and NBC Universal announced plans for a joint startup intended to shake up the way people watch TV shows online. To which the industry scoffed, “Yeah, right.”

YouTube had already established itself as the Web’s video clearinghouse, and ABC, the first network to rebroadcast TV episodes free on its site, wasn’t participating. “I think there’s a snarky desire to say, ‘This is big dumb media and this is a big dumb joint venture,’ ” Peter Chernin, president and COO of Fox’s parent company, News Corp., told The New York Times.

Today, that much-derided joint venture, now known as Hulu, is looking bigger and smarter all the time. By adhering to a few core design principles and exploiting its unusual independence, the company created what CEO Jason Kilar describes as a “high-quality, elegant, and crazy-easy-to-use” site. That almost does it justice–it’s also crazy fun. Hulu features not only Fox and NBC fare but also TV shows and movies from more than 120 sources, from the Food Network to Paramount Pictures. You can watch the most recent episodes of 24 or classics that find a second life on Hulu (if you’re looking for The Dick Van Dyke Show… ).

Last April, its first full month of operation, Los Angeles–based Hulu delivered 63 million video streams, catapulting it into the top 10 video sites. Since then, it has continued to outpace the competition. In October, buoyed by Saturday Night Live‘s hugely popular presidential-election sketches, the number of unique visitors doubled, to 24 million, and streams spiked to 235 million.

Through their unlikely collaboration, Fox and NBC have created more than a well-conceived entertainment portal. At a time when the auto, banking, and newspaper industries, among others, are facing problems too complex for any one company to solve, Hulu is a model of what’s possible when rivals work together and embrace disruptive technology. YouTube, with 5.4 billion monthly streams, may still dominate in overall traffic, but for an experience that comes closest to that of watching TV, Hulu “has set the gold standard,” says Will Richmond, president of research firm Broadband Directions. “It has optimized all of the ingredients–quality of video, navigation, controls.” (And did we mention Hulu has every episode of the canceled-before-its-time comedy Arrested Development?)

According to Kilar, 37, who previously launched and oversaw Amazon’s video and DVD business, the key to Hulu’s success is its freedom to operate essentially as a stand-alone company, largely safe from the turf battles that plague most joint ventures. Before taking the job in 2007, Kilar outlined his unconventional vision for News Corp.’s Chernin and Jeff Zucker, president and CEO of NBC Universal. “I told them, ‘I don’t think you’ll be seeing the name Fox or NBC on the site hardly at all,'” says Kilar. “Hulu is about the shows, not the networks. The shows are the brands that users care about.” Chernin and Zucker, who had told Kilar they wanted an outsider and Internet veteran in charge, signed off.

Kilar hired Eric Feng, an ex-Microsoft engineer who’d just started an online video tech company, as chief technology officer. All of 28 at the time, Feng was eager to create a site that eliminated the fitful playback and tinny audio that have plagued Web video. His team started writing code on August 6, 2007; they launched a beta version on October 29.

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Today, instead of a “postage-stamp-size screen with grainy video,” as Kilar puts it (without naming YouTube), Hulu features a larger screen and high-resolution video designed to showcase the content the networks and studios have spent millions of dollars writing, filming, and editing. There’s no player to download–the video plays instantly in a Web browser. And the site is clutter-free, avoiding what Kilar calls the “Tokyo at night” look of sites packed with blinking links.

For quality control, Hulu relies on a small army of film students and graduates from UCLA to screen every minute of video before it goes live. They recognize glitches such as a frame dropped during the encoding process–or “an explosion that doesn’t sound like an explosion,” Feng says. They also produce brief clips, slicing and dicing sitcoms and dramas into Web-friendly, appetizer-size highlights.

Hulu is free to users, generating revenue through ads. Instead of the eight minutes of commercials that are standard for a half-hour TV show, Hulu inserts only two minutes. Some experts say that as the site’s popularity grows, the networks will inevitably push to increase revenue by tweaking that ratio. “It’ll be too tempting to slip in more ads,” analyst Richmond says. “But you don’t want to kill the golden goose.”

Kilar insists that Hulu will remain “obsessed with users.” One barometer: Maureen Kilar, his sixtysomething mother. “She talks a big game, but she’s not technical,” he says. Yet when she unearthed episodes of Alfred Hitchcock Presents in the Hulu catalog, the world got another convert to watching TV without a TV. There’s plenty of time for her to discover Arrested Development.

About the author

Chuck Salter is a senior editor at Fast Company and a longtime award-winning feature writer for the magazine. In addition to his print, online and video stories, he performs live reported narratives at various conferences, and he edited the Fast Company anthologies Breakthrough Leadership, Hacking Hollywood, and #Unplug.